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from Global Investing:
Weekly Radar: Watch the thought bubbles…
Far from the rules of the dusty old investment almanac, it’s up, up and away in May after all. And judging by the latest batch of economic data, markets may well have had good reason to look beyond the global economic ‘soft patch’ – with US employment, Chinese trade and even German and British industry data all coming in with positive surprises since last Friday. Is QE gaining traction at last?
Well, it's still hard to tell yet in the real economy that continues to disappont overall. But what's certain is that monetary easing is contagious and not about to stop in the foreseeable future - whether there's signs of a growth stabilisation or not. With the Fed, BoJ and BoE still on full throttle and the ECB cutting interest rates again last week, monetary easing is fanning out across the emerging markets too. South Korea was the latest to surprise with a rate cut on Thursday, in part to keep a lid on its won currency after Japan's effective maxi devaluation over the past six months. But Poland too cut rates on Wednesday. And emerging markets, which slipped into the red for the year in February, have at last moved back into the black - even if still far behind year-to-date gains in developed market equities of about 16%!
Not only have we got new records on Wall St and fresh multi-year highs in Europe and Japan, there’s little sign that either this weekend’s meeting in London of G7 finance chiefs or next weekend’s G20 sherpas gathering in Moscow will want to signal a shift in the monetary stance. If anything, they may codify the recent tilt toward easier austerity deadlines in Europe and elsewhere. But inevitably talk of unintended consequences of QE and bubbles will build again now as both equity and debt markets race ahead , even if the truth is that asset managers have been remarkably defensive so far this year in asset, sector and geographical choices ... one can only guess at what might happen if they did actually start to get aggressive! Perhaps the next pause will have to come from the Fed thinking aloud again about the longevity of its QE programme -- so best watch those thought bubbles!
Next week's big data and events:
G7 finance ministers and central bank governors meet in London Sat
EBRD meeting in Istanbul Sat
Pakistan general elections Sat
Bulgaria parliamentary elections Sun
China April Industrial output/retail sales Mon
France/Italy bond auctions Mon
Euro group meeting Mon
US April retail sales Mon
Indonesia rate decision Tues
EZ March industrial production Tues
German May ZEW sentiment Tues
ECOFIN meeting Tues
UK 5-yr gilt/Japan 30-yr JGB/Dutch DSL auctions Tues
EZ/DE/FR/IT flash Q1 GDP Weds
UK April jobless Weds
Iceland rate decision Weds
Greek PM Samaras in China Weds
Japan Q1 GDP Thurs
UK 30-yr gilt/Japan 5-yr JGB auction/German 2-yr auction Thurs
Spain’s Rajoy meets with unions on pension reforms Thurs
Draghi speech Milan Thurs
US/EZ April CPI Thurs
US April housing starts/permits, May Philly Fed index Thurs
Turkish rate decision Thurs
Turkey’s Erdogan in Washington Thurs
G20 sherpas meeting in St Petersburg Sat/Sun
from Breakingviews:
Ailing South Korea needs monetary remedy
By Andy Mukherjee
(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)
The Bank of Korea is making a big mistake by not cutting interest rates more aggressively. A weaker Japanese yen and tepid global demand are squeezing the country’s exporters from Hyundai Motor to steelmaker Posco. Though demand from China is still growing, shipments to Europe are falling, while those to the United States have stalled (See graphic).
from Global Investing:
Amid yen weakness, some Asian winners
Asian equity markets tend to be casualties of weak yen. That has generally been the case this time too, especially for South Korea.
Data from our cousins at Lipper offers some evidence to ponder, with net outflows from Korean equity funds at close to $700 million in the first three months of the year. That's the equivalent of about 4 percent of the total assets held by those funds. The picture was more stark for Taiwan funds, for whom a similar net outflow equated to almost 10 percent of total AuM. Look more broadly though and the picture blurs; Asia ex-Japan equity funds have seen net inflows of more than $3 billion in the first three months of the year, according to Lipper data.
from The Great Debate:
Drone coalition: Key to U.S. security
The Pentagon’s biggest, most high-tech spy drone aircraft — one of the hottest items on the international arms market — is the key to a burgeoning robotic alliance among the United States, Japan, South Korea and Australia.
The RQ-4 Global Hawk, a $215 million, airliner-size Unmanned Aerial Vehicle (UAV) built by Northrop Grumman, could help this four-nation coalition monitor both China, as it increasingly flexes its military muscles, and North Korea, as it develops ever more sophisticated nuclear weapons.
from The Great Debate:
China as peacemaker
Nuclear escalation on the Korean Peninsula demands creative solutions. With a 2,200-year history of non-aggression, China is in the best position to take the lead — and relieve the United States of a burden it has shouldered for too long.
In fact, no other nation has had as stable a pattern of world citizenship. Over two millennia, China has not attempted to conquer its neighbors or spread its system of government on any scale remotely comparable to the Romans, Mongols, British, Germans, French, Spanish, Russians, Japanese or even Americans. China does brutally resist the secession of Tibet, which it considers part of its ancient patrimony. But it has not grasped for lands beyond its historical borders.
from Global Investing:
Asia’s credit explosion
Whatever is happening to all those Asian savers? Apparently they are turning into big time borrowers.
RBS contends in a note today that in a swathe of Asian countries (they exclude China and South Korea) bank deposits are not keeping pace with credit which has expanded in the past three years by up to 40 percent.
from Ian Bremmer:
China shouldn’t leave Kim Jong-un alone
Tensions are running high on the Korean Peninsula, and instability is coming if it’s not already there. North Korea is declaring that truces no longer apply, claiming that the UN is faking its report on North Korean human rights abuses and threatening “thermonuclear war” against its aggressors.
I was in China last week, where I met with senior Chinese foreign policy officials who told me they don’t have the influence over North Korea they once had. There’s a self-promotional reason to say the situation is increasingly out of their hands – it insulates them from pressure to play a leading role in punishing miscreant North Korean behavior. But I think we should start to believe them. Thus far, the normal Chinese channels have not worked. The officials told me that China has resorted to unofficial contacts – through business leaders, informal contacts, etc. – to try to pass on the word to Pyongyang. Mao Zedong famously once called China and North Korea’s relationship as “close as lips and teeth.” Today, when it comes to private bilateral communication, it seems Pyongyang’s lips are sealed, and China’s teeth are grinding.
from Ian Bremmer:
The top 10 grudges in the G-20
The G-20 is no happy family. Comprised of 19 countries and the European Union, once the urgency of the financial crisis waned, so too did the level of collaboration among members. Unlike the cozier G-7 -- filled with likeminded nations -- the G-20 is a better representation of the true global balance of power … and the tensions therein. So where are the deepest fault lines in the G-20?
Below is a ranking* of the 10 worst bilateral relationships in the G20. Russia is in four of the worst, while China is in three (although Russia and China’s relationship is fine). Several countries are also in two of the worst relationships: the United States (with the two belligerents mentioned above), Japan, the UK and the EU.
from The Great Debate:
Responding to North Korea
Now that Pyongyang has conducted its third nuclear test, the international community must accept what it cannot change: North Korea is a nuclear-arming state.
No sanctions, no carrots, no rhetoric, no threat, no military act is likely to change this fact. The question now is how to minimize risks. First, we need to take a deep breath before we leap to any new policy.
from Global Investing:
Hyundai hits a roadbump
The issue of the falling yen is focusing many minds these days, nowhere more than in South Korea where exporters of goods such as cars and electronics often compete closely with their Japanese counterparts. These companies got a powerful reminder today of the danger in which they stand -- quarterly profits from Hyundai fell sharply in the last quarter of 2012. (See here to read what we wrote about this topic last week)
Korea's won currency has been strong against the dollar too, gaining 8 percent to the greenback last year. In the meantime the yen fell 16 percent against the dollar in 2012 and is expected to weaken further. Analysts at Morgan Stanley pointed out in a recent note that since June 2012, Korean stocks have underperformed Japan, corresponding to the yen's 22 percent depreciation in this period. Their graphic below shows that the biggest underperformers were consumer discretionary stocks (a category which includes auto and electronics manufacturers). Incidentally, Hyundai along with Samsung, makes up a fifth of the Seoul market's capitalisation.
